CFL was founded in Garden Grove with only 2 employees in September 2004, dedicated to delivering high-quality name brand petroleum products and services. Today, CFL is one of the City’s top ten (10) highest sales tax producers. In August 2013, the City and CFL entered into an Operating Covenant Agreement (the “Original Agreement”) pursuant to which the City agreed to share 50% of all incremental sales tax revenues generated by CFL above those then being generated (establishing an annual sales tax base of $600,000), up to a maximum of $2,000,000, for a period of 10 years.  In addition, CFL agreed to hire additional employees, make a $2,000,000 capital investment to expand its business and provide certain operating covenants to ensure CFL remained in Garden Grove. 

In 2015, CFL approached the City requesting to renegotiate the Original Agreement to allow CFL to be more competitive in the fuel industry and on May 12, 2015, the City Council directed staff to negotiate an amendment to the Original Agreement with CFL for the Council’s consideration. On January 19, 2016, the City entered into an Amended and Restated Operating Covenant Agreement (the "2016 Agreement") with CFL pursuant to which the annual sales tax base decreased from $600,000 to $200,000 and sales tax revenues above $200,000 were split between the City and CFL according to the following revised structure:

CFL has recently approached the City to initiate discussions for revising the Amended Agreement to be more competitive in the fuel industry.  On June 16, 2023 the City received a formal request from CFL (Attachment 1).

The City desires to create and retain jobs and employment within Garden Grove.  The City has the ability to implement AB 562 (codified as Government Code Section 53083), a Statewide economic development tool for the purpose of allowing local jurisdictions to induce economic development for the creation and maintenance of jobs.  Pursuant to Section 53083, a report (the "Summary Report") (Attachment 2) has been prepared summarizing key components of the proposed transaction.  The Summary Report has been made available to the public as it is posted to the City's website and will remain for the duration of the term of the Amended 2016 Agreement, if approved by the City Council.

The City and CFL are proposing to amend the 2016 Agreement to further encourage CFL to retain its headquarters and business operations within Garden Grove and increase their investment within the community.  The City is proposing to provide financial assistance in the form of an economic development subsidy to CFL as included in the Amended 2016 Agreement (Attachment 3) and further described later in this staff report.  As mentioned above, CFL was founded in Garden Grove in September 2004 with only 2 employees. Today, the company employs approximately 80 employees, doubling their employee count from the 2016 Agreement. CFL’s sales have increased by over 350% since 2016, keeping CFL firmly in the top 10 sales tax producers for the City.

The proposed Amended 2016 Agreement makes two primary changes; 1) increases the sales tax base from $200,000 to $312,000 and 2) eliminates the tiered approached established in the 2016 Agreement to a one-tier split of 30% to the City and 70% to CFL for all sales tax revenue generated above $312,000.  If CFL continues to perform status quo, the proposed formula will result in increased sales tax revenue to the City.  While the 30% City share after the $312,000 base is less than the percentage allowed under the 2016 Agreement, CFL has not achieved that level of sales to date.  This Amended 2016 Agreement would provide the opportunity for CFL to grow their business and achieve higher sales.  If CFL can achieve those higher sales, a smaller percentage of higher sales achieves more sales tax revenue for the City. 

City Benefits

As part of these modifications, CFL would extend the proposed term of the operating covenant by 20 years (from 2036 to 2056) and commit to maintaining its business in Garden Grove as its point-of-sale through June 30, 2056. CFL has estimated that this Amended 2016 Agreement will enable CFL to expand into new markets, invest additional capital dollars in Garden Grove (minimum of an additional $10 million), and hire and retain local employees.  CFL anticipates its revenues will increase by over 350% due to increasing sales volume made possible by the Amended 2016 Agreement.  Based on CFL projections, the City would receive approximately $267 million in sales tax revenue through 2056. CFL also projects the addition of approximately one hundred (100) new jobs over a period of ten (10) years. New jobs are anticipated to include drivers, dispatchers, logistics office staff, accounting and IT positions.  CFL will work closely with the City to prioritize the hiring of Garden Grove residents.

The sale of petroleum products is conducted by a limited number of companies in California all competing for market share.  The industry is currently seeing consolidation opportunities.  The purpose of the proposed Amended 2016 Agreement is to induce CFL to remain in Garden Grove through 2056, make significant capital investment of its own funds in its business in order to increase the volume of sales in Garden Grove, and increase employment opportunities in Garden Grove. If the anticipated expansion and sales growth occurs as a result of CFL's capital investment, the Amended 2016 Agreement will result in the generation of significant additional sales tax revenues to the City’s General Fund, the creation of additional employment opportunities for residents of the City, the long-term maintenance of the Site in a first class condition, and other tangible and intangible benefits to the City.

The proposed Amended 2016 Agreement increased the sales tax base from $200,000 to $312,000.  While the 30% City share after the increased base is less than the percentage allowed under the 2016 Agreement, CFL has not achieved that level of sales to date.  Therefore, there is no negative financial impact to the City if CFL performs status quo.  If CFL’s revenue growth projections are realized, the approximately $267 million in sales tax revenues from CFL’s business would be generated through 2056 with approximately $192 million to CFL and the City receiving $75 million under the sales tax sharing structure in the proposed Amended 2016 Agreement.  Without the Amended 2016 Agreement, there is a risk that CFL would not realize the opportunity to expand their market share and could choose to relocate in the future, in which case the City would forfeit sales tax revenues attributable to CFL. 

It is recommended that the City Council:

• Conduct a Public Hearing;

• Adopt the attached Resolution making certain findings and approving the Amended 2016 Agreement with AAA Oil, Inc. dba California Fuels and Lubricants; and

• Authorize the City Manager to execute the Amended 2016 Agreement, including any minor modifications as appropriate, and any other pertinent documents necessary to effectuate and/or implement the Agreement on behalf of the City.